As class-actions continue to proliferate and cy pres provisions become increasingly common in settlement agreements, judicial oversight of these provisions has become increasingly meaningful. Cy pres provisions–which allocate a portion of the settlement funds to charities–are meant to compensate absent class members and prevent the defendant from benefitting from any unclaimed funds. The rise of cy pres has been followed by the specter of impropriety, as plaintiffs’ firms, defendants or judges may be connected to the benefitting organization. Cy pres arrangements further undermine the benevolent pretense of class action lawsuits, as they do precious little to compensate the supposedly injured class members. However, judges have recently been signaling their willingness to reject cy pres terms where they do not fulfill their purpose. A judge in the Southern District of California recently rejected an entire settlement agreement based on its cy pres provisions, following on the heels of Dennis v. Kellogg (which we blogged about here) and expressly relying on that case.

The case, In Re: Groupon, Inc. had been brought based on Groupon’s “allegedly improper expiration dates and other purportedly objectionable provisions (e.g., requirements that gift certificates be used in a single transaction, that cash refunds will not be made for unused portion, and inclusion of class action waivers and mandatory arbitration provisions)”–stipulations which hardly shock the conscience. Before the parties could agree on a forum for adjudication, the parties entered into settlement negotiations and jointly supported the proposed settlement.

Some class members, however, were nonplussed with the terms, and the judge addressed each of the objecting class members’ objections in turn—which ranged from complex legal arguments to rather simple statements indicating suspicions of self-dealing and feelings of betrayal by the plaintiffs’ lawyers. One class member indicated his sentiment that both the lawsuit as a whole and the proposed settlement were worthless: “Phuong Wolkiewicz objects to the proposed settlement on the grounds it only benefits counsel, and the terms of Groupon’s vouchers are already clear.” Another pointed out that “the settlement allows Groupon to continue its allegedly illegal behavior, i.e., setting expiration dates for the vouchers.” Perhaps it was this fact that caused Andrew E. Westley to “object[] to the claim form as confusing.”

Many of these claims were rejected, though the settlement itself–not the claim form–was indeed somewhat complex and confusing. And as the judge acknowledged, for a settlement based on allegations of unfair expiration dates, the settlement terms left much of the expiration date regime in place. But it was the cy pres provisions that were the death knell for the settlement. Under Dennis, the donation of cy pres funds must have a driving nexus to the underlying cause of the case. Here, Groupon was to distribute the last $75,000 of the settlement fund to two internet consumer rights groups. However, as the judge noted, “neither [organization] is expressly committed to righting the specific wrongs alleged in this case… That consumers purchase the vouchers on the Internet is not enough. Indeed, it is incidental to the claims at issue in this case.” Further, why should any of these funds go to consumer groups where class members might still have claims to file? The judge could find no reason why, to the extent funds were still available, they were not first offered to class members.

If the cy pres provisions had to go, so too did the rest of the agreement. Like Dennis before it, In re: Groupon may realign the interests between unnamed class members and the other parties, and it’s back to the drawing board for those crafters of the settlement.